Zions tries to find the Promised Land again

CBS.MarketWatch.com

SALT LAKE CITY (CBS.MW) -- Zions Bancorp, a darling among bank stocks until a proposed merger with a cross-town rival turned sour, is fighting to return to the Promised Land.

The bank, which drew plaudits for a series of acquisitions and solid compound annual returns from 1994 to 1999, has seen its shares fall about 20 percent since the beginning of the year, vs. an 8 percent drop in the Nasdaq Bank Index.

Its wings clipped, the company?s been trying to pick up where it left off before the proposed merger with First Security, and more importantly, to earn back its respect on Wall Street.

?I think they?re as disappointed and embarrassed as anyone,? said Erick Reim, an analyst at U.S. Bancorp Piper Jaffray. ?They want to make sure they regain their credibility.?

The $5.9 billion deal with First Security would have created the nation?s 20th largest banking company and formed a regional banking heavyweight out West with $40 billion of assets, making it a sizable competitor to the likes of Wells Fargo & Co.
WFC, -1.69%
and U.S. Bancorp
USB, -2.14%

But the transaction hit some big snags along the way: the Securities and Exchange Commission forced Zions to restate its financial results for the past three years to reflect changes in accounting for some acquisitions, and First Security later warned that its first-quarter results would be less-than-expected -- triggering a 40 percent drop in its stock price.

The miscues led Goldman Sachs & Co. to withdraw its fairness opinion saying the merger was no longer fair to Zions? shareholders, based upon the transaction?s share exchange ratio.

Zions? shareholders pulled the plug on the deal in April, and soon thereafter, First Security fled into the arms of Wells Fargo in a stock merger worth roughly $3 billion. That deal is still pending.

Tarnished reputation

Harris Simmons, chairman and chief executive officer of Zions, concedes that the failed merger has had a negative effect on his company?s stock price.

?This certainly didn?t help our reputation,? said Simmons, in an interview with CBSMarketWatch. ?It will be a day by day thing to win back the confidence of investors.?

After throwing much of the company?s weight behind the First Security transaction for more than nine months, Simmons said refocusing the company?s mental attitude has been his top priority.

?We want to make sure we put the pieces back together and get back to the basics of banking,? he said.

Simmons said the company?s top brass was obviously worried about company-wide morale after the failed merger, especially at the 68 branches Zions had planned to divest to satisfy regulators as part of the acquisition. The future of those employees had been in limbo during the merger process.

Soon after the transaction was voted down, Simmons conducted a branch tour and held town hall-style meetings to reassure the troops. What surprised him was the warm welcome he received.

?The employees have been wonderful,? he explained. ?I?ve been pleased with their response.?

Simmons also went a step further: somewhat ashamed that the First Security transaction didn?t pan out, he declined to take his bonus for 1999 even though Zions put up strong operating numbers for the year.

The two years prior Simmons collected bonuses of $235,000 and $255,000, according to the company?s latest proxy.

?It was year full of uncertainty for many of our employees . . . it was a merger I initiated and it didn?t work out,? he lamented.

Mixed view on Wall Street

Despite the big dip in Zions? stock price, several analysts are hesitant to tell investors to jump back into the stock. Instead, they are waiting for Zions to get its house back in order.

In fact, the investment community?s opinion is divided.

Shares of Zions are rated ?strong buy? by three investment firms, ?moderate buy? by four, and ?hold? by three, according to information complied by Zacks Research.

Analysts polled by First Call/Thomson Financial expect Zions to earn $2.86 cents per share this year, up from $2.66 per share in 1999, numbers Simmons said he?s comfortable with.

Dain Rauscher Wessels analyst Joe Morford, who has a ?hold? rating on the stock, remains cautious. He anticipates that the merger distractions will lead to a revenue shortfall over the next few quarters.

?Zions needs to establish its earnings momentum before it will command a superior premium,? said Morford, who has pegged Zions to make $2.85 per share in 2000.

By no means, however, do observers perceive that Zions is falling apart at the seams.

Before after-tax merger-related charges of $85.5 million, the company reported a first-quarter profit of $57 million, or 66 cents per diluted share, on total revenue of $259 million, vs. a profit of $47.5 million, or 56 cents per diluted share, on revenue of $234.5 million, for the same period in 1999.

And excluding the merger-related charges, its return on assets and return on equity -- the yardsticks by which banks are measured -- were an impressive 1.26 percent and 26.27 percent respectively.

Zions also managed to grow it lending portfolio, posting a 13 percent increase in total loans compared to the prior period while maintaining stable asset quality. Its ratio of nonperforming assets to total loans was 0.59 percent.

Nonetheless, ?all the vital signs look good,? said David Winton, an analyst at Keefe, Bruyette, & Woods. ?This isn?t some beat down company, down on their luck.?

Back to the future

Before its ill-fated merger with First Security, Zions was an aggressive buyer of community banks in California, Arizona, Colorado, Washington and Nevada.

It expanded its footprint in the western states by scooping up 18 small banks from 1997 to 1999, and by doing so, boosted its assets by 100 percent.

Zions currently has $21 billion of assets and operates 350 branches in eight states.

Simmons said Zions doesn?t plan to strike any deals until the company is back to full strength, but he did say the company would continue to evaluate opportunities as they appeared on the radar screen.

Zions is also trying to seize upon opportunities in the so-called ?new economy.?

In a promising development, Zions is positioning itself to capture its portion of the so-called ?digital certificate services? market through its subsidiary, Digital Signature Trust (DST). See site.

To date, DST has signed several significant contracts including the General Services Administration, National Institutes of Health, Department of Defense, and the Social Security Administration.

Zions plans to raise between $50 million to $100 million in venture capital funding to support the unit?s growth. DST?s main competitor in the digital certificate market is VeriSign Inc.
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Even though DST?s revenue generation remains a wildcard in terms of what it will contribute to Zions? bottom line, analysts said the technology appears promising while also noting that DST may produce substantial gains for Zions and its shareholders in a possible initial public offering.

?We?ve put this failed deal behind us and know we have lot of opportunities to build market share out west,? Simmons said. ?I think we can win back the confidence of investors again.?

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